Debt, be gone

Fifty-something couple wants solution to get rid of pesky debts

Elias and Dana feel like they're running in place on a line-of-credit treadmill.

Try as they might, the married couple just can't make any progress against a credit-line debt of about $93,000.

Elias and Dana's finances

Income:

Elias: $80,404 ($4,407 net a month)

Dana: $7,080 ($590 net a month)

Monthly expenses: $5,161 (excludes credit card payments)

Debts:

All-in-one credit line: $93,000 at 3.5 per cent

Credit cards: $13,000 at 19.99 per cent

Car loan: $6,517 at 6.24 per cent

Assets:

Home: $171,000

Elias RRSP: $58,296

Dana RRSP: $32,316

Net worth: $148,095

"We can't dig ourselves out of a hole," says Dana, 54, a part-time worker earning about $590 a month.

Dana has been hunting for full-time work for months while Elias, a self-employed tradesman taking home about $4,400 a month, is the main contributor to the household finances.

The couple's main source of debt is an all-in-one credit line, a hybrid line of credit, mortgage and bank account rolled into one. Marketed as a simplified credit and savings strategy, all-in-one credit lines allow borrowers to pay down debt more quickly because income is paying interest costs more frequently and over time helps reduce amortization, which saves borrowers money.

But Elias and Dana's experience has been less than optimal.

"If you're regimented with your finances, it works, but it doesn't work for us," Dana says.

Rather than gaining ground, they are actually going in the other direction.

When they opened the credit line a few years ago to renovate their home, they owed about $50,000. The work on their home cost about $25,000, but since then, they have added about $20,000 more in debt.

Now they're worried they may be even deeper in the hole by the time they retire at 65 in 10 years.

The credit line isn't their only debt either. They also owe about $6,500 on a car loan and $13,000 on a credit card at 19.99 per cent.

Dana and Elias say they know what their problem is. They're overspending. But only after recently examining their last three months of banking statements did they realize just how much money they were spending on discretionary items -- such as dinners out, cigarettes, lottery tickets and alcohol.

"Apparently we like to live well, but we have no money to support the lifestyle," says Dana.

"I guess if we moved to the hills and ate squirrels, we would be OK, but is there any hope for us?"

Financial counsellor Yvonne Neu with the non-profit Community Financial Counselling Services says Dana and Elias have at least taken that important first step toward solving their financial malaise. They recognize their problem for what it is. They spend too much.

Based on their figures, they have a shortfall of about $210 a month. "But that is before they make any payments toward their credit cards."

Neu suspects their cost of living is actually higher than indicated because they make no allowances for items such as clothing and car repairs.

To get a better feel of their true costs, they need to continue tracking spending for several weeks and months. But that doesn't mean they shouldn't wait to put the brakes on overspending now.

To start, they could use the following road map as a rough guide.

"To have their debt paid off in 10 years, they would have to make at least $930 monthly payments at 3.5 per cent interest, and that's not including the credit card debt," Neu says.

Dana and Elias need to make additional $245 monthly payments to eliminate that debt too,

"But they can't incur any more debt along the way so that means on an ongoing basis they either have to reduce or increase income by $1,125 per month for the next 10 years."

To make this plan work, they need to earn $6,075 a month. Right now, they only take home about $4,900 a month. While Dana should continue hunting for additional work, and Elias should also consider working overtime, they should also trim their budget -- substantially.

And probably a good place to start trimming the fat is discretionary spending. Over the last three months, they have spent on average $400 on cigarettes, $245 on dinners out, $400 on lottery tickets and $900 on alcohol every month. That's nearly $2,000.

Neu says she never tells clients how to cut costs. It's up to them to decide, but it's important for Dana and Elias to track their spending because not only is it required to get their costs in line with their income, but it also raises awareness to help guide cost-cutting.

"Usually when people keep track and write it down, they will often make the realization 'Holy crap I didn't realize I spend that much on Timmy's!' "

In the meantime, they should reconsider using their all-in-on credit line as their main banking account because this strategy is exasperating the problem.

"We're seeing more clients with this kind of line of credit, and it's not working," says Neu. "You're like a gerbil on the wheel -- working hard but not getting anywhere."

As an alternative, they should open a normal savings account where their cheques can be deposited. Then they can make $930-a-month payments on the all-in-one line of credit like it was a regular mortgage payment.

This strategy will make it much more difficult to overspend.

They also can take steps to increase the likelihood of success.

One option involves actually increasing their line of credit. Because their home is worth $171,000, they should have room to roll the credit card debt and the car loan onto the credit line. Both these debts carry higher interest rates, so moving them onto the credit line would reduce their total monthly payment and get them debt-free faster -- providing they stick to their debt-repayment plan.

Their success, however, will largely depend on their ability to cut discretionary costs. Neu says Dana and Elias don't have to cut those 'fun' expenses entirely, but reducing spending on alcohol and cigarettes, for example, will likely help them make the most progress.

Cutting these costs won't be easy. Meticulous tracking of spending along with discussing spending limits are a must.

It's also important that the saver in the relationship has control over the purse strings.

"It's like harm reduction," Neu says. "If one person is the spender and the other is saving, debt reduction is really hard."

While the road ahead is difficult, the fact is Elias and Dana should have enough income now to balance their budget and get out of debt in time for retirement because it's discretionary spending -- not money going toward the essentials -- that is hurting their finances.

Dana and Elias just need to figure out what goals are most important to them and then find a way to spend accordingly, Neu says.

"If they write down everything they spend for at least two months, reviewing those expenses to make decisions about how committed they are to get rid of this debt in 10 years, they will find the options to still have a life without it costing as much."

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